In financial markets, risk profiling of an individual helps financial advisor in identifying a person’s ability to deal with risk at various level while investing. It is a duty of financial planner to focus on risk profiling before they suggesting a product to their client. Risk profiling generally divide individuals to certain category such as conservative, moderate, aggressive Investors. Risk profiling process of every people is varied due to environmental factor such as peer pressure, market sentiment, changing moods of individuals, and rising age.
Based on the assessment of client’s tolerance to risk, Peter and Janet Lie can be categorized as a risk indifferent person as they have the courage to take investment with high-return yet high-risk probability. In addition Peter and Janet Lie prefer high growth investment with a middle ground of risk. Apparently, Peter and Janet Lie’s concept of high-return with middle ground risk are not in line, it is impossible for the them since high return investment requires high risk as well (consistent relationship).
Whereas the tolerance is inversely related to the risk class; thus, the Geiger the risk, the lower the tolerance. According to Graham’s theory, Peter and Janet lie can be classified as moderate investor. Based on Graham’s Theory a moderate investor is bias towards income producing but expecting more growth in investments than conservative investor. They concern about capital growth and focus on maintaining to preserve their assets as well.
This proven by the questionnaires answered by them, Peter and Janet Lie would cut their losses and transfer their funds into more secure investment sectors (such as bonds or debentures) if their portfolio value has decreased in value by 20% after six months after placing investment. Furthermore, Peter and Janet Lie have experienced high-risk investment in the past, therefore they know that high risk investment generally have a small accessible liquidity, as the result they now have a higher concern about their capital.
The inconsistencies that I found in questionnaires is Peter and Janet Lie are actually a moderate investor who supposed to have spare assets to offset unpredictable or unexpected occasions in the future, but in facts they only provide a small proportion of fund that readily accessible for emergencies such as dental and car repairs. These emergencies can be a serious setback if the clients are not prepared. The amount of emergency fund relies on the current lifestyle and expenses. They supposed to have more or less 3 months of income set aside to meet emergencies without depending on credit cards.
A cash management trust that gives high interest is a suitable place to keep emergency funds. Since both Peter and Janet Lie are moderate investor, their primary investment’s goal focuses on capital growth, therefore they can keep up with some fluctuations in their investment’s value to anticipate a higher return. They look tort balance to income and capital growth over medium-to-long term, they are organized to take short-term risk to gain a potential longer term capital growth, they also like to observe an investment conscientiously to prevent a loss in value in the future.
It would be Peter and Janet Lie if they choose medium risk structure investment with long investment period, since they prefer long-term investment and the returns generated by this kind of investment is promising and with lower risk compared to long term investment as well. They are supposed to invest 40% in income producing sets, such as fixed interest and 60% in growth assets, such as shares and property. The suggested minimum investment timeshare is 3-areas.